Economists React: ‘Shop til You Drop? Hardly’

—Shop ‘till you drop? Hardly. Shop ‘till you’re tired? Not quite yet. Shop? Yes, but just a little. Households are hardly flooding into the stores these days. For the second consecutive month, retail sales fell and for the second consecutive month you cannot simply blame weak motor vehicle demand for the problems. Even excluding vehicles, sales were off in June. –Naroff Economic Advisors

—To say the least, recent volatility in the stock market and ongoing weakness in the labor market has served to depress consumer confidence which in turn helped limit the pace of consumer spending. However, while the headline numbers are not pretty, there are some positive takeaways from today’s retail sales report. Core sales, which serve as a plug for GDP, were up 0.2%, the first gain since March. As well, while sales at building materials and auto dealers predictably declined, sales at clothing stores rose for the first time since March as did sales at Department Stores which were up 1.1% in the month. Furthermore, sales at non-store retailers, i.e. internet based retailers, rose 1% for the second month in a row all of which suggests that while sales fell in a broad based sense, consumers did manage to go to the mall. –Dan Greenhaus, Miller Tabak

—Sluggish sales, even “ex” the noise. Headline sales fell 0.5%, driven down by the decline in auto sales, a price-related fall in gas, and the on-going correction in building material spending (which spiked in early Spring). Even after excluding these noisy categories, which we do by using the so-called “control group” (the GDP input), sales rose just 0.2% on the month, and were revised down the last two months (May now -0.2% from +0.1%; April now -0.4% from -0.2%). Momentum has slowed in the control group. –Jay Feldman, Credit Suisse

—The headline result for June was dragged down by price-related weakness at gas stations (which was right on expectations) as well as a larger than anticipated decline at auto dealers. Meanwhile, the main sources of the downside surprise in June retail control were: grocery stores, home furnishings and the sports/books/music grouping. Also, the key general merchandise and apparel categories both posted smaller than anticipated gains. The grocery store category has now posted outright declines in 3 out of the past 4 months which may reflect a loss of market share to the big box discount stores and the clubs. Of course, this means that the underlying discretionary demand in the general merchandise category may be even softer than implied by the recent sales performance. –David Greenlaw, Morgan Stanley

—The dead cat has left the building: despite a record 9.0% plunge in building material sales for May, the category failed to receive the typical post-plunge rebound in June. We view the building materials and accompanying furniture sales drops as reflective of weak housing market demand, and ultimately it was the lack of a dead cat bounce in these categories that caused core sales to fall short of expectations. Building materials sales declines of an additional 1.0% point towards continued weakness in construction spending, as residential improvement projects represent about 15% of all US construction activity. –Guy LeBas, Janney Montgomery Scott

—The underlying trend of consumer data clearly shows deceleration in recent months. Looking ahead, with household balance sheets still over-leveraged, the key determinant of consumer spending growth going forward will be the pace of the recovery in the labor market and hence the path of wage and salary income. Our own view is that the labor market recovery will be a grudging one, that consumers will enjoy only modest gains in wages and salaries for some time, and that consumer spending growth will therefore be moderate at best. –Joshua Shapiro, MFR Inc.

—We would like to emphasize that this still decent expansion of household spending in second quarter as a whole is partly due to a statistical overhang, i.e. solid growth at the end of the first quarter that helps to lift the second quarter number. In the course of the second quarter, consumer spending has visibly lost momentum, and with only benign income gains, we expect more moderate expenditure increases (about 2.25%) for the second half of 2010. –Harm Bandholz, Unicredit

— Up until a few weeks ago, I had been expecting consumer spending to kick into a higher gear in the second half, on the back of accelerating hiring and income gains. This optimistic outlook has been dashed on the rocks of uncertainty, as I detailed last week. Now, I expect real consumer outlays to tread water, advancing at a steady clip of close to 3% throughout the year. –Stephen Stanley, Pierpoint Securities

—All in all, although retail sales have disappointed in the second quarter as a whole, the rebound in core retail sales in June is an encouraging sign for prospects for the third quarter, during which consumer spending should continue to be supported by solid wage and employment growth. –Peter Newland, Barclays Capital

—Consumer spending growth has clearly decelerated from the first quarter, but overall still looks to be growing modestly. –Zach Pandl, Nomura Global Economics

—The downward revisions to the April and May data were fairly broad-based. However, the relatively weak spending pace in those two months must be taken in context with the strong gains reported earlier in the year. Retail sales excluding autos, gasoline, and building materials rose by 0.6% in January, 1.4% in February, and 0.6% in March, the best three-month advance (10.9% annualized) since 2003. The subsequent weakness in April and May could in large part represent payback from that blistering (and unsustainable) spending pace. Indeed, over the first six months of 2010 (taking into account both the surge and the pullback), retail sales ex-autos, gasoline, and building materials are up 4.5% annualized, which is better than the 3.3% annualized gain registered in the second half of 2009 and is in line with the pre-recession trend. Thus, while the deceleration in consumer spending in [the second quarter] will no doubt fuel concerns over the household sector, we do not think the consumer (or the economy) is headed for a double dip. –Michelle Girard, RBS

—Shop ‘till you drop? Hardly. Shop ‘till you’re tired? Not quite yet. Shop? Yes, but just a little. Households are hardly flooding into the stores these days. For the second consecutive month, retail sales fell and for the second consecutive month you cannot simply blame weak motor vehicle demand for the problems. Even excluding vehicles, sales were off in June. –Naroff Economic Advisors

—To say the least, recent volatility in the stock market and ongoing weakness in the labor market has served to depress consumer confidence which in turn helped limit the pace of consumer spending. However, while the headline numbers are not pretty, there are some positive takeaways from today’s retail sales report. Core sales, which serve as a plug for GDP, were up 0.2%, the first gain since March. As well, while sales at building materials and auto dealers predictably declined, sales at clothing stores rose for the first time since March as did sales at Department Stores which were up 1.1% in the month. Furthermore, sales at non-store retailers, i.e. internet based retailers, rose 1% for the second month in a row all of which suggests that while sales fell in a broad based sense, consumers did manage to go to the mall. –Dan Greenhaus, Miller Tabak

—Sluggish sales, even “ex” the noise. Headline sales fell 0.5%, driven down by the decline in auto sales, a price-related fall in gas, and the on-going correction in building material spending (which spiked in early Spring). Even after excluding these noisy categories, which we do by using the so-called “control group” (the GDP input), sales rose just 0.2% on the month, and were revised down the last two months (May now -0.2% from +0.1%; April now -0.4% from -0.2%). Momentum has slowed in the control group. –Jay Feldman, Credit Suisse

—The headline result for June was dragged down by price-related weakness at gas stations (which was right on expectations) as well as a larger than anticipated decline at auto dealers. Meanwhile, the main sources of the downside surprise in June retail control were: grocery stores, home furnishings and the sports/books/music grouping. Also, the key general merchandise and apparel categories both posted smaller than anticipated gains. The grocery store category has now posted outright declines in 3 out of the past 4 months which may reflect a loss of market share to the big box discount stores and the clubs. Of course, this means that the underlying discretionary demand in the general merchandise category may be even softer than implied by the recent sales performance. –David Greenlaw, Morgan Stanley

—The dead cat has left the building: despite a record 9.0% plunge in building material sales for May, the category failed to receive the typical post-plunge rebound in June. We view the building materials and accompanying furniture sales drops as reflective of weak housing market demand, and ultimately it was the lack of a dead cat bounce in these categories that caused core sales to fall short of expectations. Building materials sales declines of an additional 1.0% point towards continued weakness in construction spending, as residential improvement projects represent about 15% of all US construction activity. –Guy LeBas, Janney Montgomery Scott

—The underlying trend of consumer data clearly shows deceleration in recent months. Looking ahead, with household balance sheets still over-leveraged, the key determinant of consumer spending growth going forward will be the pace of the recovery in the labor market and hence the path of wage and salary income. Our own view is that the labor market recovery will be a grudging one, that consumers will enjoy only modest gains in wages and salaries for some time, and that consumer spending growth will therefore be moderate at best. –Joshua Shapiro, MFR Inc.

—We would like to emphasize that this still decent expansion of household spending in second quarter as a whole is partly due to a statistical overhang, i.e. solid growth at the end of the first quarter that helps to lift the second quarter number. In the course of the second quarter, consumer spending has visibly lost momentum, and with only benign income gains, we expect more moderate expenditure increases (about 2.25%) for the second half of 2010. –Harm Bandholz, Unicredit

— Up until a few weeks ago, I had been expecting consumer spending to kick into a higher gear in the second half, on the back of accelerating hiring and income gains. This optimistic outlook has been dashed on the rocks of uncertainty, as I detailed last week. Now, I expect real consumer outlays to tread water, advancing at a steady clip of close to 3% throughout the year. –Stephen Stanley, Pierpoint Securities

—All in all, although retail sales have disappointed in the second quarter as a whole, the rebound in core retail sales in June is an encouraging sign for prospects for the third quarter, during which consumer spending should continue to be supported by solid wage and employment growth. –Peter Newland, Barclays Capital

—Consumer spending growth has clearly decelerated from the first quarter, but overall still looks to be growing modestly. –Zach Pandl, Nomura Global Economics

—The downward revisions to the April and May data were fairly broad-based. However, the relatively weak spending pace in those two months must be taken in context with the strong gains reported earlier in the year. Retail sales excluding autos, gasoline, and building materials rose by 0.6% in January, 1.4% in February, and 0.6% in March, the best three-month advance (10.9% annualized) since 2003. The subsequent weakness in April and May could in large part represent payback from that blistering (and unsustainable) spending pace. Indeed, over the first six months of 2010 (taking into account both the surge and the pullback), retail sales ex-autos, gasoline, and building materials are up 4.5% annualized, which is better than the 3.3% annualized gain registered in the second half of 2009 and is in line with the pre-recession trend. Thus, while the deceleration in consumer spending in [the second quarter] will no doubt fuel concerns over the household sector, we do not think the consumer (or the economy) is headed for a double dip. –Michelle Girard, RBS